Compounded Rates
In order to reduce the impact of outliers in daily fluctuations of financial markets, many financial products use simple or compounded averages of a given reference rate. For instance, on every business day the New York Federal Reserve Bank publishes the average rate of the Secured Overnight Financing Rate, compounded over the last 30 calendar days under the name of SOFR30.

Standard Methodology

Here, we present the methodology of compounded rates that is used by large banks such as the New York Federal Reserve Bank (compounded SOFR) and the Bank of England (compounded SONIA).
Consider a unit investment over a time period of
dcd_c
calendar days containing
db≀dcd_b\leq d_c
business days. Let
rir_i
be an interest rate that is published once every business day and assume that the business day convention is such that the year has
NN
days. Then, the compounded gain
GG
over the whole interest period results to
​
.
We remark that for constant interest rates
ri=rr_i = r
and
ni=1n_i = 1
this simplifies to the well-known compounded gain formula
G=(1+rN)dbG=\left(1+\frac{r}{N}\right)^{d_b}
. However, in general, the rate factor
nin_i
is an integer value that accounts for
ii
being a business day or a non-business day. More precisely, if
ii
is a business day followed by
kk
non-business days, we set
ni=k+1n_i = k+1
. For instance, if
ii
is followed by a business day, i.e.,
k=0k=0
, we have
ni=1n_i=1
. For a friday, which is usually followed by two non-business days, we would have
ni=3n_i = 3
. Now, in order to get the average interest
II
from the compounded gain
GG
, we subtract the original investment and normalize, thus obtaining
​
I=Ndc[∏i=1db(1+riΓ—niN)βˆ’1]I = \frac{N}{d_c}\left[\prod_{i=1}^{d_b}\left( 1 + \frac{r_i \times n_i}{N} \right) -1\right]
​
which is the formulation of compounded rates used by the FED and the BOE amongst others.

DIA Methodology

The methodology from the previous section has a special feature in that it mixes compounded and non-compounded rates. More precisely, investments are not compounded for weekends and holidays. This behaviour is reflected in the rate factor
nin_i
. In the Index
IDIAI_{DIA}
presented below, investments are compounded over all calendar days in the respective interest period.
Consider a unit investment over a time period of
dcd_c
calendar days. Let
rir_i
be an interest rate that is published once every business day and assume that the business day convention is such that the year has
NN
days. We define an interest rate
r~i\tilde{r}_i
such that
r~i\tilde{r}_i
coincides with
rir_i
on business days and is set to the rate of the previous business day if
ii
is a holiday or a weekend. In this straightforward manner we obtain an interest rate for all calendar days and can now set
​
IDIA=Ndc[∏j=1dc(1+r~jN)βˆ’1].I_{DIA}=\frac{N}{dc}\left[\prod_{j=1}^{d_c}\left( 1 + \frac{\tilde{r}_j}{N} \right) -1\right].
​
Link to API documentation: Coming soon!